At Liz Claiborne, a Bold Fashion Statement

The company’s chief executive has outlined a plan to make the apparel giant far less dependent on department store sales.

MICHAEL BARBARO

In mid-April, as orders for fall clothing began pouring into the headquarters of Liz Claiborne — the apparel giant behind Juicy Couture, Kate Spade and Lucky Brand Jeans — executives paid unusually close attention to one buyer, Macy’s.

Liz Claiborne’s decision to develop a new product line for J. C. Penney had infuriated Macy’s chief executive, Terry J. Lundgren, company officials said. Executives expected small cuts in Macy’s orders for fall — punishment, in their eyes, for cheating on their biggest client — but what arrived “shocked us,” said the new chief executive of Liz Claiborne, William L. McComb.

Macy’s slashed orders for the Liz Claiborne brand by millions of dollars. “You have lost your most-favored-nation status” at Macy’s, Mr. Lundgren told executives at the clothing company, according to people who witnessed the conversations.

The impact was disastrous. Liz Claiborne’s first-quarter earnings plunged 65 percent and Wall Street pummeled the stock, knocking it down more than 17 percent, to $37 from $45.

For decades, apparel conglomerates like Liz Claiborne, Jones Apparel Group and Kellwood have grudgingly tolerated life under the thumb of department stores, tailoring clothing designs to the chains’ seasonal whims and paying out “markdown” money to stores when fashions fail to sell.

And they have paid a steep price for that obedience, laying off employees, selling brands and losing profits. So far, none of the big apparel companies that counted the department stores as their chief customers have successfully charted an alternative course.

But Mr. McComb, 44, one of the youngest and least-experienced chief executives in the fashion industry, is plotting an insurgency. Since arriving at Liz Claiborne eight months ago, he has outlined a radical plan for weaning the company off its reliance on department stores like Macy’s by building hundreds, if not eventually thousands, of its own retail stores.

The strategy, Mr. McComb said, is “stupid simple”: focus on a few promising brands like Juicy Couture, Kate Spade and Lucky Brand, market them heavily, and painstakingly control their images in company-owned retail stores and a handful of department stores. The goal is to be more like Coach and Ralph Lauren and less like a lumbering, unwieldy conglomerate.

It is all highly logical, if not laudable, analysts and employees said. But how Mr. McComb is carrying it out has turned him into either a model of foresight and courage or of shortsightedness and hubris, depending on whom you ask.

In short order, he has wiped out an entire tier of experienced, senior executives at Liz Claiborne, announced up to 800 layoffs, split the company into two organizations and put 16 brands with loyal followings (like Ellen Tracy, Dana Buchman and Sigrid Olsen) up for sale — a move that could cut loose $800 million worth of sales in one fell swoop.

Current and former Liz Claiborne executives said that Mr. McComb had damaged morale by effectively creating two tiers of brands — winners (like Juicy, Lucky and Kate) and losers (like Ellen, Dana and Sigrid). “It’s no fun to learn you haven’t made the A Team,” said one well-known designer whose brand is up for sale, who spoke on condition of anonymity because the company forbade employees from discussing the changes.

Mr. McComb said there was no choice. Liz Claiborne, whose founder died last month, had simply become too big, weighted down by too many brands and managers. “You put a nickel here and nickel there, and those nickels do not add up to moving the needle,” he said during an extended interview in his Seventh Avenue office.

“People ask me, ‘Isn’t Ellen Tracy a great brand?’ and ‘Doesn’t Dana Buchman still have runway to grow?’ The answer is yes,” he said. “That is what puts us in a quandary. The issue is, when you really flesh out the opportunity that these brands have and work that has to be done, it takes a set of resources that we don’t have to do every one of them.”

The Liz Claiborne that Mr. McComb inherited was, according to its detractors, a bloated giant perpetually trying to digest its latest acquisition. Under its previous chief, Paul R. Charron, the company bought more than a dozen brands, like the contemporary European clothing company Mexx, the high-end, traditional women’s label Ellen Tracy, and the preppy handbag maker Kate Spade.

The buying binge gave Liz Claiborne several of its most promising lines and reliably bolstered sales year after year. But the strategy was running out of steam.

In 2005, the nation’s two biggest department stores, Federated and May, merged, turning local chains like Marshall Field’s and Filene’s into Macy’s, which had been under the Federated umbrella. The combined company, now called Macy’s Inc., closed dozens of stores, leaving Liz Claiborne with fewer places to sell its wares.

The flagship Liz Claiborne clothing brand, a nearly $2 billion business within the company, was hard hit by the merger. Weak sales of the classic-looking clothing had left it vulnerable, and the agreement last year to develop a line for J. C. Penney’s, called Liz & Co., appeared to worsen matters.

Liz Claiborne had sold clothes to J. C. Penney for years, under the name Crazy Horse. But the new Liz & Co. name sounded an awful lot like the legacy Liz Claiborne brand. “It was the use of that precious capital ‘L’ that made them crazy,” Mr. McComb said, speaking of Macy’s.

Mr. Lundgren, the Macy’s chief, said in an e-mail message that there was no vengeful or ulterior motive in his decision to pull back. “It’s no secret that the Liz Claiborne brand’s sales performance has been deteriorating for several years,” he said. “Any adjustments in our orders with any vendor are solely a function of the performance of that merchandise in our stores.”

Asked about his “most-favored nation” remark, however, Mr. Lundgren added that “our customers come to Macy’s expecting to find merchandise that is not widely available.”

Macy’s has not been the only problem for Liz Claiborne, which will report second-quarter earnings today. Classic fashions, which it churns out in spades, have been losing out to smaller contemporary clothing labels. And layers of management from acquisitions have eaten into profit margins. Since 2003, operating margins fell from 11 percent to 8 percent — lagging behind rivals like Jones New York, the VF Corporation and Ralph Lauren — even as revenue rose to $5 billion from $4.2 billion.

Last year, when Liz Claiborne’s board of directors approached Mr. McComb, then a division president at Johnson & Johnson, about taking the chief executive job, they told him they wanted a change.

“The kite had run out of string,” Mr. McComb said. “You would not call it a wrecked turnaround. But it was a turning point.”

Mr. McComb, the only outside candidate presented to the full board, faced a single internal candidate, Trudy Sullivan, who was president of the company (and has since left to become chief executive of Talbot’s). At several junctures, Mr. McComb broke off the negotiations and appeared to walk away, according to people briefed on the matter, and the search dragged on for 10 months.

But the board was convinced he was the right man. At Johnson & Johnson, Mr. McComb had overseen the team that reinvigorated sales of Tylenol, emphasizing its strength as a pain reliever, rather than its safety, and rolling out new Tylenol products like an eight-hour pill and rapid-release gel caplet.

The big question mark, however, was his lack of retail and fashion experience, outside of a one-year stint managing shoe sales at a Lazarus department store in Indiana in 1985.

A few weeks into the job, Mr. McComb sent out an e-mail message to 200 senior managers asking them to identify the biggest barriers to their success. The responses, often pages long, hit on the same themes: too much bureaucracy, not enough focus on design.

Four different presidents, running four different divisions, held responsibility for fragments of a single brand like Juicy Couture. Designers had to fight the finance department to pay for a flight to Paris for a fashion show. Marketing was lavished on some brands, nonexistent for others.

The solution, he said, was to pare down the entire company, keeping only the brands with the potential to sustain dozens of retail stores, multiple product categories (not just clothing, but shoes, handbags and cosmetics) and international growth.

Four made that cut: Juicy Couture, Lucky Brands, Mexx and Kate Spade. By 2010, the company plans to open 300 new stores for these labels. It will operate 148 Juicy stores, up from 56 today; 311 Lucky stores, up from 189; 120 Kate Spade stores, up from 40; and 275 Mexx stores, up from 234.

The brands to be sold, closed or licensed are distributed largely through department stores: C&C California, Emma James, Enyce, First Issue, Tapemeasure, Laundry by Design and Prana, among others. Several department store brands, like Liz Claiborne (an umbrella including Axcess, Claiborne, and Concepts by Claiborne), the DKNY Jeans group and Monet will remain inside the company.

Dismantling the old, convoluted management structure, Mr. McComb eliminated the roles of five group presidents and gave control of each major brand to a single team, rather than parceling out responsibilities for, say, accessories and department store sales to several different departments.

Analysts have roundly endorsed the plan, in theory. Omar Saad of Credit Suisse said that Mr. McComb had taken “the necessary bold moves to transform the business.” Jennifer Black, who runs an investment company by the same name, applauded Mr. McComb for recognizing that department stores “are not a growing business,” adding, “Liz must control its own destiny.”

Not everyone inside the company agrees. The 16 brands up for sale are in limbo, their designers feeling adrift. At the same time that he has been ousting experienced executives, Mr. McComb has further irritated some longtime employees by hiring Tim Gunn, a former dean at Parsons School of Design and the star of the reality television show “Project Runway,” as chief creative officer. Mr. McComb said Mr. Gunn’s appointment was a direct response to designers,’ complaints that their voices were not heard within the company.

The bigger question, of course, is whether the brands Mr. McComb has chosen to invest in will thrive and turn the company around. Does the world need 148 Juicy Couture stores? Can Kate Spade, a brand whose buzz has begun to die down, become the next Coach?

Mr. McComb thinks so. “We have whittled away all the distractions and focused on things that, if we put marketing dollars into, real marketing dollars into, and we work on out distribution strategy, we can really drive growth and value for our shareholders.”

The fashion world is watching closely. If Mr. McComb’s plan works, it could provide a road map for Liz’s foundering rivals. After an interview, on the balcony outside his office overlooking the garment district, Mr. McComb pointed to the offices of those competitors. “If I jump,” he said, “they can all see me.”

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